Homebuying July 04 2017

How is My Mortgage Interest Rate Determined?

If you are in the process of applying for a mortgage or plan to in the future, you may have heard of the importance of locking in a low-interest rate. For those of you just getting started, your mortgage interest rate is the fee for the amount borrowed set by the lender. But how does the lender determine this rate? While the general interest rate market is sensitive and fluctuates with the economy, there are a few factors that influence what is known as risk-based pricing. When a lender approves a borrower for a loan, they trust that the borrower will be able to pay back the amount loaned. In order to determine how risky a borrower might be, lenders will consider these five factors:  

1. Credit Score

This is where your credit history comes in. Lenders use your credit score as one of the first (and most important) indicators of risk. The lower your credit score, the more risk you bring to the table, therefore the higher your interest rate may be. If your credit score is struggling, try picking up some of these four credit building habits!

2. Loan-to-Value (LTV) 

The LTV is the ratio of your loan to the value of the property. The lower your LTV, the more equity you have in your home, the less chance you have of defaulting, so overall, a lower interest rate.

3. Property Type 

The property type considers whether the property is a home, condo, etc. For example, a condo may collect a higher interest rate to pay for maintenance of the building it is a part of. In addition, the property is classified based on its purpose. Is it a primary home, secondary home or investment property? A second home or an investment property is not the homeowner's primary expense, so it has a higher risk of default, thus might have a higher interest rate.

4. Down Payment

Once you have found the right home and evaluate the home price, you can formulate what down payment will be. The loan amount is the home price minus your down payment.  Typically, the larger the down payment, the lower the interest rate so you'll want to make sure you save for your down payment!

5. Loan Type 

The loan type addresses what type of loan you are applying for, including the term and interest rate.

  • The loan term will be the time in which you will pay back the loan. For shorter terms, the interest rate is generally lower, but monthly payments will be higher than a long-term loan.
  • The two types of interest rate types are: fixed and adjustable. A fixed interest rate is set when the loan is closed and does not change. An adjustable interest rate begins with a fixed-rate period and then changes depending on how the market’s doing. In general, adjustable rates will have a lower initial interest rate but will be unpredictable after the fixed period is over.

 

Now that you know how your interest rate is determined, it's time to find the best mortgage rate for you!

Contact a Loan Officer Today!

Search Results for query

May 25 2021

When is the Right Time to Refinance Your Mortgage?

Mortgage rates have been at historic lows for years, but with the post-pandemic economic uncertainty and possible inflation looming, there's been a scramble for homeowners considering refinancing.

Read More

May 20 2021

How to Choose the Right Closing Date on a New Home

What you need to know about setting a date that works for you and might save you money.

Read More

May 13 2021

4 Questions You Must Ask Before Buying a Home

We've put together some questions to ask yourself when the time is right for you to buy a home.

Read More

May 06 2021

4 Mistakes Buyers Make in a Seller's Market

Buying your dream home in a seller's market is possible if you're able to avoid these common mistakes.

Read More

April 28 2021

Understanding Closing Costs

An important part of calculating your budget when home shopping includes considering closing costs, which are additional payments you will need to either pay upfront or roll into your loan and gradually pay off

Read More

April 21 2021

The Just-Right House

Home sizes in the U.S. have been growing steadily over the years, and with our sudden shift to stay-at-home living, new home buyers are thinking hard about what that means for them as they plan their dream homes. Here are a few factors to consider.

Read More

April 15 2021

How to Get a Mortgage When You're Self-Employed

Here are a few things you need to consider to land the best possible mortgage when you're self-employed.

Read More

April 07 2021

3 Surprising Refinancing Mistakes

When refinancing, be careful to avoid some pitfalls and traps that could cost you money in the long run. Here are some of the most common mistakes people make when they rush to refinance.

Read More

March 31 2021

10 Unexpected Spring-Cleaning Tips

Keep your home in the best possible shape with these surprising life hacks.

Read More

12345Last

Mortgage Calculators

Crunch the Numbers With Our Helpful Mortgage Calculators

Payment Calculator

payment calculator

Payment
Calculator

Affordability Calculator

affordability calculator

Affordability
Calculator

Refinance Calculator

refinance calculator

Refinance
Calculator

The Modern Digital Mortgage with a Personal Touch

Paperless. Effortless. Awesomeness TM

Simplify the home financing process with our Digital Mortgage. We'll be here to help navigate you through the entire process.

Get Pre-qualifiedWhat is a Digital Mortgage?